How GST Has Helped The Government To Increase Tax Revenue?

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Published Date:  26-11-2023   Author:   moulik-jain
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By establishing a unified market throughout the nation, the adoption of GST has played a critical role in boosting the ease of doing business. With the implementation of a streamlined tax structure and process flow, firms’ compliance obligations have been significantly reduced. GST has benefited the government in improving tax compliance, broadening the tax base, and increasing total tax receipts. The reform has laid the groundwork for the country’s tax administration system to be open and self-policing.

Before, the inclusion of many indirect taxes, such as VAT, excise duty, sales tax, service tax, and so on, resulted in huge cascading and tax evasion via arbitrage. The GST has replaced the complex indirect tax structure with a streamlined, technology-driven tax system. GST has greatly broadened the tax base by including a sizable portion of the economy.

GST-simplified taxes and methods like e-invoicing, e-way bills, and invoice matching have improved inter-state trade monitoring and tax evasion enforcement. The simplified tax system has also reduced the compliance expenses of taxpayers.

These factors have enhanced the government’s indirect tax collection since the establishment of the GST. GST collections topped Rs. 7 lakh crore in its first year, representing a 9% increase above prior system income. Due to continuous system upgrades, it will likely increase GST tax revenues in the next few years.

GST Tax Revenue – An Overview

GST is levied on products and services throughout the production and distribution stages. It has absorbed a variety of significant indirect taxes, including, among others, central excise duty, service tax, central sales tax, state VAT, purchase tax, entertainment tax, and luxury tax.

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GST tax revenue collection has grown during the early transitional period after its implementation. From Rs. 94,064 crore in 2018-19 to Rs. 1.05 lakh crore in 2019-20, monthly GST revenue grew by 11% yearly. According to budget predictions, GST revenue would exceed Rs 6.9 lakh crore in 2020-21.

Net indirect revenue from taxes has grown substantially in the post-GST timeframe concerning the pre-GST indirect tax regime. The overall indirect tax revenue of the center and provinces was Rs. 8.84 lakh crores in 2016-17, rising to Rs. 11.77 lakh crores in 2019-20, showing a 15% enhanced annual growth rate.

Several factors have contributed to the long-term increase in GST revenue. The GST rate structure was moved closer to the ideal rate system via regular rate rationalization operations. E-way bills, which allow for improved monitoring of interstate commodity transportation, have significantly boosted compliance. 

Due to the streamlined return filing method and the availability of input tax credits, many new taxpayers have joined the tax net. Finally, economic progress and formalization have increased GST collections. Still, as the global economy has slowed, GST income growth has decreased in the last few months. To get the most GST tax revenue, efforts must be taken to streamline the GST system, encourage compliance, and stable rates.

GST’s Impact on Government Revenue

The roll-out of GST has advantageously impacted the overall tax revenue gathered by the national and provincial administrations. The gradual implementation of the Goods and Services Tax has resulted in an ongoing rise in the Federal Government’s tax income as a share of GDP. Gross revenues from taxes scaled as a portion of GDP from 6.5% in 2016-17 to 7.3% in 2019-20.

Description 2018-19 2019-20 2020-21
Revenue Under Protection (Rs. Crore) 530,545 604,821 689,496
SGST Collection (including IGST Settlement) (Rs. Crore) 468,722 457,743 420,025
SGST Collection (including IGST Settlement & GST Compensation) (Rs. Crore) 526,993 562,158 542,887
SGST Collection (including IGST Settlement & GST Compensation from all Sources*) (Rs. Crore) 631,390

Table: GST Revenue of 18 Major States in India

Additionally, GST’s involvement in the Centre’s total tax collection has gradually increased from 18% in 2017-18 to roughly 22% in 2019-20. In the GST era, the percentage of tax receipts in overall GST tax revenues has also grown for state governments. Tax income as a proportion of total revenue increased for states from 55.5% before GST to 59% in 2019-20.

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Expanding the tax base and increasing compliance under the unified GST structure may be ascribed to the incremental gain in indirect tax revenues for the Union and State governments. With continued improvements to the GST systems, tax buoyancy is projected to develop further in the future years.

GST has also aided in resolving the issue of revenue discrepancies between producing and consuming states. The earlier VAT model provided greater cash to building conditions with a substantial industrial presence. GST has enabled governments to get equitable and timely compensation for revenue losses.

However, the federal government’s recent refusal to pay the GST compensation cess has impacted state income. Furthermore, excluding petroleum products such as petrol and diesel from the ambit of the GST has resulted in revenue losses for the states. Bringing them under GST jurisdiction may aid in increasing GST tax revenues.

Overall, the introduction of GST widened the income base. However, lower GST rates on particular goods and compliance issues provide a financial challenge. Policy actions are essential to avoid GST tax revenue leakage, enlarge the tax base, and establish an appropriate tax rate structure.

GST’s Impact on Economic Growth

GST has created a single national market by providing tax neutrality and inter-state uniformity. Consequently, economic activity, productivity, and investment have increased, resulting in medium to long-term GDP growth.

Due to transition issues, the move to GST impeded growth in the short term. In 2017-18, GVA growth in the industrial and services sectors stagnated. The economy has since recovered, and the GST has generated an overall growth dividend.

Various industries have had varying degrees of effect. Abolishing interstate checkpoints benefited the logistics sector by reducing transit time and costs. Industries such as FMCG, electronics, and automobiles have profited from improved supply chain efficiency.

The export sector has grown more competitive as a result of the elimination of the cascading effect of taxes under GST. Credit availability has enhanced the liquidity of exporters. Certain services, such as IT exports and R&D, are now tax-free.

The lower GST rate on imported commodities compared to locally made goods, on the other hand, has hurt the Make in India campaign and created an unfair playing field for domestic goods. There are further industry-specific issues to be addressed.

GST has produced a business-friendly environment, enhanced export competitiveness, and integrated the Indian market. Addressing challenges in several economic sectors may further benefit economic growth and job creation.

GST’s Impact on Tax Compliance

GST has resulted in structural changes that have increased taxpayer compliance behavior. Compliance is made simpler by features such as a simplified return filing method, online registration, an input tax credit system, and a common site for tax payments. Making compliance easier for small businesses has brought many more into the tax net.

E-way bills, e-invoicing, and TDS/TCS regulations have all been adopted to strengthen reporting standards. Tax evasion has been reduced as a consequence of the digital transaction trace. The GST compliance structure has considerably improved, as shown by an annual return filing rate of more than 80%.

Major Head Description Taxes Subsumed into GST
0042 Tax on goods and passengers Partial : Tax on entry of goods into Local Areas (0042-106)
0006 State Goods and Services Tax (SGST) Fully
0023 Hotel Receipts Tax Fully
0005 Central Goods and Services Tax (CGST) Central GST (including IGST settlement)
0044 Services tax Full

Table: Union Government Revenue Basket

However, repeated changes to return filing methods have increased the compliance burden on taxpayers. Additional enhancements to the compliance ecosystem are conceivable. The e-way bill system may be linked with FASTag and RFID to improve real-time monitoring of goods movement. 

The GSTN system must be connected with customs, income tax, and other government agencies to correlate trade and income data better. Analytics and artificial intelligence might be used to identify potentially hazardous transactions. Such strategies have the potential to reduce tax evasion while increasing compliance.

Standards of GST Tax Compliance Based on Technology

  • Network Integration of the Goods and Services Tax

The Goods and Services Tax Network (GSTN) is based on a technology system that offers the technological resources and services necessary to launch GST in India. GSTN created a conventional GST platform that taxpayers may use to register, submit returns, make payments for taxes, and claim reimbursements. The GSTN system links national and state government tax systems and covers activities like authorization, tax return submission, tax payment, IGST settlement, and MIS reporting.

  • Technology’s role in strengthening the handling of taxes

GSTN, as well as the GST site, have promoted transparency, optimized procedures for compliance, and improved the overall handling of taxes. Among the many advantages are:

  • Transfers are processed in real time, enhancing accuracy and decreasing mistakes.
  • Returns for taxation are immediately verified via system-level integration, eliminating fraud.
  • The eWay bill system is used to trace the flow of products and improve monitoring.
  • Transaction data analytics to find inconsistencies and enhance enforcement.

Criticisms and Challenges

  • Initial teething issues with GST installation

When GST was implemented in 2017, the GSTN system had several early challenges, such as technical issues with portal functionality, complexities in filing procedures, delays in settling refunds, and so on. Because of the vast magnitude of the transition, taxpayers throughout the nation faced adaptation issues.

  • Various stakeholders’ criticisms and concerns

Compliance requirements were expensive and time-consuming for traders and SMEs. GSTN system technical and capacity issues, as well as a lack of comprehensive cybersecurity and data protection controls, were identified. Delayed announcements, inconsistent decisions, and compliance costs heightened uncertainty. Critics saw the complicated tax system as burdensome in terms of compliance.

Conclusion

To recap, the implementation of GST has raised overall tax revenue collections for the federal government and the states. It has also increased GST impact on tax compliance via structural innovations, including simplified procedures, e-way bills, and a consolidated gateway. However, constraints such as high tax rates on some goods, compliance issues, and a delay in fixing the inverted duty structure have prevented GST revenue from achieving its full potential. Its overall GST impact on government revenue on economic growth has been positive, although it varies between sectors.

Moving forward, policy efforts must concentrate on rationalizing and stabilizing GST rates to get them closer to revenue-neutral levels. It would be prudent to incorporate items such as fuel into the GST ambit progressively. A solid compliance environment with few limits should continue to be a primary priority. Addressing industry-specific tax issues is crucial. With such consistent success, GST may assist India in meeting its economic growth and development objectives.

FAQs

  • How has the installation of GST led to an increase in government tax revenue?

GST has simplified the taxation system by removing various indirect taxes, decreasing tax evasion, and broadening the tax base, resulting in increased total tax revenues.

  • In what ways has GST aided in the reduction of tax evasion and the increase of government revenue?

The clear and technology-driven architecture of GST has made it more difficult for enterprises to dodge taxes. The digital trail of transactions assures improved GST impact on tax compliance, which reduces the possibility of tax evasion and contributes to higher tax income.

  • Can you explain how GST has widened the tax base and benefited government finances?

GST has brought formerly unorganized sections of the economy into the official economy, broadening the tax base. Many enterprises that were previously exempt from taxation have become compliant, resulting in a considerable increase in tax income for the government.

  • Which sectors contribute the most to GST revenues?

Manufacturing, real estate, and professional services are the top sectors contributing to GST revenues. Sectors like electronics, FMCG, infrastructure, automobiles, etc., have seen significant growth in GST collections.

  • Has GST resulted in a wider tax base?

Yes, the number of GST registrations has gone up consistently, showing a wider tax base. Total number of GST registrants increased from 1.28 crore in July 2019 to 1.39 crore in July 2022.

  • How has GST benefited the states?

States’ revenues have increased due to a rise in tax base and better compliance. Also, the GST compensation cess paid by the central government has assured states a 14% annual growth in GST collections.

  • Has GST led to increased tax collection efficiency?

Yes, by removing the cascading effect of taxes and simplifying GST’s impact on tax compliance, GST has increased tax collection efficiency. The tax-to-GDP ratio has improved under GST, indicating higher collection efficiency.

  • What are the challenges still faced in GST implementation?

Key challenges are the complexity of tax structure, compliance burdens on MSMEs, revenue leakages due to fake invoices, and fraudulent input tax claims. Efforts are being made to simplify GST procedures further.

  • What is the future outlook of GST?

GST is still stabilizing but holds great promise for the future. Widening the tax base and improving compliance further could make GST the principal source of tax revenues for India in the coming years.

  • How has GST benefited the central government?

The central government’s tax revenue has increased substantially under GST due to a wider tax base and improved compliance. IGST and cess collections have also added to the central government’s revenues.

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Moulik Jain

I am a seasoned marketer specializing in Tax, Finance, and MSMEs who brings a wealth of hands-on experience to demystify complex subjects, providing insightful guidance for entrepreneurs and finance enthusiasts alike.

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